"The government, in our view, would like to use the Budget as an opportunity to revive the economy with a focus on the poor and masses. Discretionary consumption is a structural theme,"
"The government, in our view, would like to use the Budget as an opportunity to revive the economy with a focus on the poor and masses. Discretionary consumption is a structural theme," Gaurav Mehta, Fund Manager, Ambit Asset Management, said in an exclusive interview with Moneycontrol’s Sunil Shankar Matkar.
Q. Nifty is expected to close the year with more than 20 percent gains. What is the kind of target you have for the next 12 months (December 2018)?
A. I would not want to hazard a guess on Nifty levels at a specific point in the future, and would rather focus on businesses that can compound at healthy rates for years to come. There are several structural opportunities in the listed space and therefore being too focused on a narrow index and its performance on a quarterly or a yearly basis may not be of much use in capitalizing on these longer-term trends. That said, we do think that an earnings upcycle should commence soon and therefore equities should do well over the next few years.
Q. Are you finding markets expensive at current levels? Is it still buy on dips market?
A. There is no denying the fact that the kind of elevated valuations that you are seeing today leave little room for disappointment. The good part, however, is that over the last ten odd years we have hardly grown at 6-7 percent CAGR on corporate earnings. Over the long term however corporate earnings in India have trended at 13 percent per annum. That therefore means that the earnings base today is pretty depressed and if an earnings recovery does materialise, valuations that appear expensive today will start looking much more reasonable.
In fact on valuation measures like cyclically adjusted PE (or CAPE as it is popularly known), the Sensex trades at a modest premium to long term averages. So the real question to be answered is that whether or not the earnings cycle is recovering rather than obsessing about valuations.
Q. Will reforms announced by Modi government revive Indian economy and earnings before general elections 2019 and How important are these state elections ahead of General Elections 2019?
A. We think that after the near term disruptions around demonetisation and GST things do appear to be slowly inching towards normalcy. Moreover, global data prints point to a reviving global economy as well.
If the government executes well on infrastructure projects like Bharatmala, that should help reflate the economy too. So on earnings as well as economy, it does appear that we are close to a revival, especially so for the formal economy and organized players.
On the importance of state election results, these are milestones that help gauge the mood of the electorate. We as an economy have borne the short term brunt caused by demonetisation and GST and that would have affected the mood of the voters.
And, if growth picks up from here on as long term positives of these reforms start fructifying, that should reflect in the attitude of voters as well going forward. However, state elections are at the end of the day a vote for the state government and should not entirely be extrapolated as indicative of trends at the central level.
Q. As we are near the year-end and no major events (apart from Gujarat elections) lined up, next key events are earnings and Budget. What are your expectations from the last full-fledged budget of the Modi government?
A. As it is, there has been a lot of action over the past few months on whole host of things like indirect taxes, PSB (public sector bank) recap, Bharatmala etc. The government, in our view, would like to use the Budget as an opportunity to revive the economy with a focus on the poor and masses. However the fiscal headroom available has been constrained what with a recent dip in indirect tax collections on the one hand and with international commodity prices on the rise on the other. While recent measures like preponement of e-way bill implementation should help increase compliance to GST, thereby leading to subsequent increase in indirect as well as direct tax collections, in the interim financing of some of the pro-poor measures through increase in anti-rich taxes isn’t ruled out.
Q. Top sectors or themes which you think stand to gain the most in 2018?
A. Formalisation of the economy is a big theme in our view. Sectors where unorganised players still continue to be a dominant portion of the market should witness an accelerated consolidation in favour of organised players. The recent preponement of e-way bill shows the intent to make the reform work and should accelerate such a shift.
While categories in the home building sector like tiles, pipes and ply come immediately to mind, this is a theme that we believe will play out across a host of sectors.
Specialty chemicals is another space that we like. Low cost manufacturing, process and research capabilities and IP (intellectual property) protection have been some strengths that have worked in favour of Indian companies. China’s focus on cleaning up its air which has led to massive shutdowns of chemical capacities in that country will mean disproportionate benefit for Indian players.
Finally discretionary consumption is a structural theme in a country like India, where per capita GDP is low and rising. We like entertainment as a category in this space.
Q. As crude is hovering around USD 60-65 a barrel, do you think this could be a big concern for Indian Economy? At what crude level, India can manage its economy?A. High crude prices could either translate into higher inflation or higher fiscal deficit either way hurting the economy. However, the rise so far has been manageable, in our view. The flip side is that rising commodities are reflective of reviving global economy which in turn should have positive rub-off on the Indian economy. An environment of benign commodity inflation with good economic growth if anything should be a positive.
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